Mitt Romney’s wrong: You can balance the budget through taxes. But you may not want to.

August 9, 2012

"Mathematically there are three ways of balancing a budget," Mitt Romney told Bloomberg Business Week. "One is by cutting spending; one is by growing the economy; and the last is by raising taxes." So far, so good. But Romney went on to say this:

The challenge of raising taxes is that it depresses growth. And so like a dog chasing its tail, you can’t get to a balanced budget by simply raising taxes. As a matter of fact, it is ultimately counterproductive.

What Mitt Romney is suggesting here is that taxes have such a large and negative effect on growth that raising them does not lead to net new revenues, or at least not enough net new revenues that you can support federal spending in the 22 percent of GDP range. This is a convenient argument for Romney as it gives him a reason, beyond simple conservative dogma, to oppose any and all tax increases. But it's not true. You can get from where we are to a balanced budget by raising taxes. You may not want to. But you can.

Photo: Win McNamee / Getty Images

We know this from both international experience, historical experience, and economic modeling. Economist Bruce Bartlett, author of one of the best books on tax reform, notes that "there are many countries with tax/GDP ratios well above our current or projected spending/GDP ratio. In other words, it could be done if we were willing to adopt European-style tax systems." Len Burman, an economist at Syracuse university, makes a similar point. "Our taxes are at about 28 percent of GDP.  In Denmark, the [tax burden] is closer to 48 percent.  Their GDP per capita is about the same as ours."

Joel Prakken, an economist at Macroeconomic Advisers, points out that "we had very nearly balanced budgets back in the 1960s through the mid-1970s when top marginal tax rates were much higher than they are now."

Indeed, the average budget deficit from 1950 to 1980 was 1.17 percent of GDP. The average budget deficit under Ronald Reagan and George W. Bush -- so, under the major tax-cutting presidents -- was 3.1 percent of GDP. The average budget deficit under Bill Clinton was 0.7 percent of GDP. So, yes, tax cuts lead to deficits and tax increases close them.

(For the record, the average deficit under Obama has been 9.3 percent of GDP, largely due to the financial crisis, which has driven spending way up and taxes way down. So while I don't think it makes sense to judge the financial crisis as a normal period in the American budget, the fact is that tax revenues have plummeted during Obama's term and deficits have gone up. So he fits the pattern.)


Source: CBO

But perhaps there's something unique about America that makes it impossible to close the gap through taxes? Not according to the Congressional Budget Office. Their 2012 Long-Term Budget Outlook modeled a scenario in which Congress does nothing and we tumble over the fiscal cliff. In that world, non-interest spending falls by two percent of GDP over the next 10 years, and taxes rise by 5.4 percent of GDP. So while this scenario is not solely based on raising taxes, it's mostly based on raising taxes.

The result? By 2022, the budget, not counting interest payments, is more than balanced (a condition economist call "primary balance," and which was the goal, for instance, of the Simpson-Bowles Commission). With interest payments, the deficit is 1.2 percent of GDP -- which is easily manageable.

Now, there are many reasons you don't want to do this. One is that an all-tax deficit reduction plan would do more harm to the economy than a mixed deficit-reduction plan, particularly if it's not accompanied by substantial tax reform. But what Romney is saying here -- which is that you simply can't balance the budget through taxes -- isn't accurate.

The other problem with his comments is that an all-spending plan is also counterproductive, particularly in the short-term. As both Bartlett and Prakken emphasized, standard economics suggests that, in the short-term, spending cuts will do more damage to the economy because they tend to hit poorer Americans, and poorer Americans tend to spend what they have. It's in the long-term that relying on tax increases hurts you. But in terms of job creation, right now, which Romney says is his top priority, spending cuts would, indeed, be counterproductive.

The answer, as most economists will tell you, is that you need a plan that mixes spending cuts and tax increases, preferably through tax reform. But thus far, Romney has continued to pledge that he will never, under any circumstances, raise taxes. So how will he get to a balanced budget?

 First, I will eliminate programs that are not absolutely essential. Obamacare is one of the easiest to eliminate from my standpoint and that saves approximately $100 billion a year. There are also programs I would return to the states where their growth can be managed and where they will be carried out with less fraud, inefficiency, and abuse. So for example, Medicaid, housing vouchers, food stamps, and other programs of that nature, I believe, can best be administered by the states. And finally I will cut the number of federal employees through attrition by at least 10 percent, and I will link their compensation with that which exists in the private sector. The plan that my team and I put in place achieves a balanced budget within eight years and does so without raising taxes.

This reply would make you think that there's somewhere you can go to read a plan from Mitt Romney and his team that identifies a set of spending cuts that will lead to a balanced budget within eight years. There is no such plan, nor is there anything even close to such a plan.

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